Rationalisation, decriminalisation, digitsation: The three-pronged view to reduce MSME compliance burden

Ease of Doing Business for MSMEs: The burden of compliance for MSMEs is disproportionately high while their resources are limited. They need to deal with 27 licenses, registrations, permissions and consent orders.

Rationalisation, decriminalisation, digitsation: The three-pronged view to reduce MSME compliance burden
  • By Rishi Agrawal

Ease of Doing Business for MSMEs: Over 90 per cent of India’s enterprises are MSMEs. The nation’s 63 million MSME enterprises contribute approximately 28 per cent of the GDP, 45 per cent of manufacturing output and 40 per cent of exports. The sector engages over 111 million people which makes it the second biggest employer after agriculture. Globally, it is agreed that the growth of MSMEs is key to economic revival. It is often assumed that MSMEs do not have to worry about compliances. However, it could not be farther from the truth.

The burden of compliance for MSMEs is disproportionately high while their resources are limited. They need to deal with 27 licenses, registrations, permissions and consent orders. Such enterprises can be pulled up by at least 20 different inspectors under various Acts. To meet these obligations they need to work with multiple consultants. The opportunity cost is high, leaving little time and resources for skill development, technology upgradation, or applying for benefits.

Here is the applicable compliance burden of a hypothetical but typical MSME. Industry research has modelled obligations for a representative enterprise operating in the state of Maharashtra with an office and a factory, around 100-150 employees, and turnover in the range of Rs 10-20 crore. Such a company is required to deal with 364 compliances in a year across 27 different acts, that is, almost one compliance a day.

Consequences of non-compliance include severe financial penalties or even jail term. A conservative estimate of the annual cost of compliance for a typical MSME is around Rs 12 lakhs, that is, Rs 1 lakh per month. Owing to the complexity and ambiguity involved, MSMEs are forced to deal with professionals such as CAs, CSs, EHS consultants, lawyers for end-to-end managed services. These third-party consultants make a substantial portion of the cost. Outsourcing contracts are not only expensive but also require time, attention and human resources. Despite several initiatives on ease of doing business, the reality on the ground tells a different story.

Also read: Strong execution of stimulus package must for reviving MSMEs, says GAME task force; suggests measures

There is a strong need to thoroughly review the existing compliance burden on MSMEs via a three-pronged framework of rationalisation, decriminalisation and digitisation.

  • Rationalisation: India’s regulatory ecosystem has a universe of over 1,500 Acts, 69,000 Compliances and 6,600 filings and intimations. It is important to reduce the number of applicable Acts and Compliances on MSMEs. Identify and eliminate duplication in statutory record keeping. As an example, there are at least five different acts which require maintenance of the wage register in different formats. Further, at least four different acts require maintenance of an accident register (fatal, non-fatal). There are multiple inspectors who, under various Acts, can inspect salary data, leave and attendance data, health and safety records among others. The rationalisation exercise should review the relevance of compliances on a three-step test – legality, necessity, and proportionality. There should be stakeholder consultation and analysis of costs and benefits of compliances on all stakeholders. Only those compliances which pass all three criteria should be retained.
  • DecriminalisationThere are over 8,000 provisions with possible jail terms in Indian laws. Many are applicable to MSMEs. Entrepreneurs can go to jail for simple procedural oversights, non-maintenance of records in prescribed formats and missed deadlines. Entrepreneurs do not belong in jail. Ambiguous interpretation of the law adds to the misery. A thorough review of criminalisation should be undertaken at a national level on proportionality and equivalence. Intention to commit fraud should be separated from inadvertent non-compliance or honest mistakes.
  • DigitisationMSMEs spend a lot of time in paper-based, manual filings. License renewals require in-person submission of paperwork to the concerned authority at a government department. These applications must be accompanied with certificates issued by other government departments, such as registration certificate, Articles of Association, Memorandum of Association, Fire NOC, Electrical NOC, Consent to Establish, Consent to Operate, Factory License etc. Three to four in-person follow-ups are considered to be a standard operating procedure. A digital ecosystem like the DigiLocker is needed for Corporate India which can serve as a secure vault of all government-issued documents for ready reference. Digital tracking of applications should be available to cull in-person visits to various departments. The government should collaborate with software product providers who can automate data processing and create records without manual intervention. A three-tiered incentive mechanism with services offered for free, freemium, and premium rates, could be tried. Small MSMEs could be given these services for free so they confidently navigate the complex compliance landscape. We already have a working model in the form of GSTN, which is being constantly improved, to pave the way for such a compliance management ecosystem.

Rishi Agrawal is the CEO & Co-Founder of Avantis Regtech (A TeamLease Company). Views expressed are the author’s own.

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